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Do Corporate Governance Motives Drive Hedge Fund and Private Equity Fund Activities?


  • We thank the participants of the 2009 EFM Symposium on Corporate Governance and Control in Cambridge for valuable comments. We also thank an anonymous referee for valuable comments and suggestions on earlier versions of this paper. Financial support from the Deutsche Forschungsgemeinschaft through the Bonn Graduate School of Economics is gratefully acknowledged.


We document empirical evidence that both hedge fund (HF) and private equity fund (PE) investments are driven by corporate governance improvements, but address different types of agency conflicts. Whereas HFs focus on firms without a controlling shareholder, in particular family shareholders, PEs invest in firms with low managerial ownership. Both appear to address free cash flow problems differently. Aiming at increasing dividends, HFs tend to use commitment devices that can be implemented over a short horizon. PEs are inclined to longer-term strategies: they target firms that are particularly well suited for leverage increases because of low expected financial distress costs.